10.1 SEBI Prohibition of Insider Trading — Core Rules

10.1 SEBI Prohibition of Insider Trading — Core Rules

Quick Answer: Under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), no insider may trade in securities of a listed company when in possession of UPSI, and no person may communicate, provide, or allow access to UPSI except for legitimate purposes, duty performance, or legal obligations. Independent directors of listed entities are typically connected persons and must follow the company’s code of conduct, trading window, pre-clearance, and disclosure machinery administered by the compliance officer.

Securities law is not a side hobby for independent directors of listed Indian companies. You sit in rooms where earnings, mergers, investigations, and leadership changes are decided before the market knows. That information advantage is exactly what the PIT regime polices. On the IICA Independent Director proficiency test, PIT items test status (are you an insider?), conduct (trade / tip / selective leak?), and systems (code, compliance officer, window, disclosures)—not obscure enforcement trivia.

Why PIT Exists (Director-Level Policy Logic)

Fair markets require that investors trade on information that is generally available, not on board-pack secrets. Insider trading and tipping:

• Transfer wealth from uninformed public investors to insiders and their tippees.
• Destroy trust in disclosures and in the integrity of boards.
• Create personal civil and criminal exposure for directors and officers.
• Damage the company’s reputation even when the company itself is not the “trader.”

Independent directors are hired partly to protect minority and market fairness. Violating PIT—or tolerating a culture that treats UPSI casually—contradicts the role.

The Regulatory Framework (Exam Map)

Exam tip: PIT is securities-market law aimed primarily at listed securities and related derivatives/contexts defined in the Regulations. Do not apply full listed-company trading-window machinery to every private limited company stem unless the fact pattern involves listed securities or a listed group entity.

Who Is an “Insider”?

Under the PIT Regulations, an insider is broadly:

1. A connected person; or
2. A person in possession of or having access to UPSI.

That second limb is crucial: even someone who is not a director can be an insider if they actually hold UPSI. Conversely, connected persons are presumed close to the information flow of the company.

Connected persons (core idea)

Connected persons include people associated with the company in a way that is expected to give them access to UPSI—directors, certain employees, and other persons in professional or business relationships, subject to the detailed definition in the Regulations. The definition also reaches people who are deemed to be connected (for example certain relatives and entities linked to connected persons, as framed in the Regulations).

For independent directors, the practical teaching point is simple:

Why independent directors are “typically connected persons”

1. Board access: You receive packs, presentations, and closed-session briefings on results, strategy, M&A, and risk.
2. Committee roles: Audit, NRC, and risk committees often see UPSI earlier and in more detail than the market.
3. Fiduciary seat: The office itself is a formal association with the listed entity.
4. Market expectation: Investors and regulators assume directors know material non-public developments.
5. Code designation: Company codes almost always treat directors as designated persons for trading restrictions and disclosures.

Exam trap: “I am independent, so PIT does not apply to me.” Independence under section 149 is about promoter/pecuniary relationships for appointment criteria—it does not create a PIT exemption. If anything, IDs are more scrutinised because their legitimacy rests on integrity.

Twin Prohibitions You Must Memorise

1. Prohibition on trading while in possession of UPSI

No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of UPSI relating to those securities (subject to limited defences/exceptions structured in the Regulations—such as certain bona fide transactions or trades pursuant to trading plans where validly adopted—at a high level for this exam).

Trade is broader than “I clicked buy on my app.” It includes buying, selling, dealing, and agreeing to deal, directly or indirectly, as framed in the Regulations. Using family accounts, HUFs, controlled companies, or “someone else’s demat” does not sanitise a trade motivated by UPSI.

Possession test (director mindset):

• If you have non-public material information that a reasonable investor would use in deciding to trade, assume UPSI possession until public dissemination and a sensible digestion period under company procedures.
• You do not need a formal stamp saying “THIS IS UPSI” on every slide. Substance controls.

2. Prohibition on communication of UPSI (with a narrow gate)

No person shall communicate, provide, or allow access to any UPSI to any person, including other insiders, except where such communication is in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations.

Scenario: After audit committee, an ID texts a college friend: “Don’t quote me, but Q4 will shock on the downside—maybe lighten the stock.” That is classic improper communication of UPSI (and can facilitate illegal trading by the tippee). The ethical and regulatory answer is identical: do not tip.

Code of Conduct for Listed Companies

The PIT Regulations require listed companies (and certain intermediaries/fiduciaries in their own way) to adopt a code of conduct to regulate, monitor, and report trading by designated persons and their immediate relatives, and to handle UPSI responsibly.

Typical code themes independent directors must live inside:

1. Identification of designated persons (directors, specified employees, fiduciaries as applicable).
2. Trading window closure and re-opening around financial results and other UPSI events.
3. Pre-clearance of trades above thresholds when the window is open.
4. Contra-trade restrictions after a trade.
5. Disclosure of holdings and trades to the company/exchange as prescribed.
6. Chinese walls / information barriers in complex organisations.
7. Structured digital database entries when UPSI is shared for legitimate purposes.
8. Internal sanctions for violations, without prejudice to SEBI action.

Independent directors should read the company’s PIT code on joining, not discover it after a botched trade. Onboarding diligence (Chapter 6 themes) includes asking: Who is the compliance officer? What is the window policy? How do I pre-clear? How are relatives covered?

Compliance Officer

The company designates a compliance officer (typically a senior officer capable of discharging the role under the code) responsible for:

ID practice: Direct personal trading questions to the compliance officer, not to the CFO “offline,” and retain written pre-clearance records. Informal WhatsApp clearance is not a control system.

Contra-Trade Restrictions (High Level)

Many codes, implementing the PIT framework, restrict contra trades by designated persons: after buying, you may be barred from selling (and vice versa) for a minimum period (commonly discussed in market practice as a six-month type restriction under the regulatory design—confirm the exact code text applicable to your company). The policy goal is to discourage short-swing trading that looks like misuse of intermittent information advantages.

Director rules of thumb:

• Plan personal liquidity outside blackout periods and with pre-clearance.
• Do not buy in January and sell in March “because the stock moved” if contra-trade rules still bind you.
• Hardship exceptions, if any, go through formal compliance channels—not self-help.

Exact numerical thresholds and periods can be amended; the exam cares that you know contra-trade limits exist, bind designated persons, and are administered under the code/compliance officer, not that you recite every circular amendment from memory.

Trading Plans (Awareness Level)

The Regulations also contemplate trading plans as a structured way for insiders to trade at future times under pre-disclosed parameters, reducing the allegation that a particular trade was timed on live UPSI. Trading plans are technical, approval-driven, and relatively uncommon for the average ID vignette. For the proficiency test, know they exist as a regulated exception pathway, not as a casual loophole you invent after receiving a board pack.

How PIT Interacts with Other ID Duties

Worked Scenarios (Exam Style)

Scenario A — Results in the pack. You receive draft quarterly numbers showing a large impairment. Window is closed. Your broker calls with a “great entry point” on the same stock. Action: No trade; no “maybe later this week” hint; wait for public disclosure and window reopening/pre-clearance rules.

Scenario B — Legitimate advisor share. The board authorises sharing deal UPSI with a law firm under NDA for acquisition due diligence. Compliance logs the sharing in the structured digital database. Action: Proper legitimate-purpose communication with controls—not a free-for-all forward to personal Gmail chains.

Scenario C — “I’m not trading, my spouse is.” Your spouse buys call options after you mentioned a likely dividend surprise at home. Action: This is exactly how tippee cases and code breaches arise. Do not share UPSI at home; treat immediate relatives’ dealing as covered risk under the code.

Scenario D — Resignation letter as press leak. You resign over governance concerns and immediately detail unpublished investigation findings to a business channel before exchange disclosure. Action: Legitimate regulatory reporting channels differ from selective media dumping of UPSI. Coordinate disclosures lawfully; do not convert dissent into an illegal leak.

Personal Compliance Checklist for Independent Directors

1. Assume you are a connected person / designated person on listed boards.
2. Identify UPSI in every board and committee pack.
3. Never trade while in possession of UPSI; respect window and pre-clearance.
4. Never tip—including soft hints, partial facts, or “confirmations” to favoured investors.
5. Share UPSI only for legitimate purposes with need-to-know controls and database hygiene.
6. Know your compliance officer and keep written trails.
7. Map family and controlled-entity accounts into your personal dealing policy.
8. Report holdings/trades as required—late disclosure is its own failure mode.
9. Escalate culture problems (leaky management, selective briefings) to the board/audit committee.
10. When in doubt, do not trade and do not talk—ask compliance.

Common Exam Traps

• Believing independence status exempts PIT duties.
• Thinking only employees (not non-executive IDs) are insiders.
• Equating “the window is open” with “I may trade while holding live UPSI.”
• Treating verbal tips as harmless if no cash commission was paid.
• Assuming SEBI action is the company’s problem only—personal liability attaches to insiders.
• Confusing Companies Act related-party rules with PIT (related but distinct regimes).

Bridge to the Next Section

You now own the who and what is forbidden. Section 10.2 deepens UPSI content, generally available information, trading windows, pre-clearance, disclosures, structured digital database, Chinese walls, board-pack handling, and relatives’ trading—the operational detail independent directors use every results season.